2/18/08 Clicker Question: Which is False? A) Tariff decreases consumer?s surplus by a+b+c+d B) Decrease in consumers?? surplus is offset by gains of the producers C) New level of imports is Q3 to Q4 D) The region of b+d is a gain to producers E) Gov. revenue equals Q3-Q4 times the amount of the tariff Correct answer: D D is a dead weight loss, a loss on all parties behalf Commute gains and losses from tariff Gain in PS (a) Rectangle: base times height: 40 * .4 (tariff) Triangle: ½base times height: ½(40) * .4 Gov. revenue: 40 * 20 (base times height of Q3 to Q4 Dead Weight Loss b + d: the are of both triangles added together Example: US steel import Tariffs of 2002 New 30% tariff on major steel imports Temporary protection Campaign promise Dead weight loss = $200 million a year Impact on users of steel Retaliation against $2.2 billion US exports by trade partners under the WTO Large Country Analysis of Tariff International Free Trade Equilibrium (look at slides), 6.8, 6.9 Pft = equilibrium price under free trade P? = New world price P? = P? + tariff = effective price to US consumers Q4 ? Q3 is the new level of imports (for America) Q?4 + Q?3 = exports (for foreign country) a + b + c + d = loss of consumer surplus a = gain in producer surplus b + d = Dead weight loss c + e = Gov. revenue if e > b + d = there is a net gain to society to imposing a tariff
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